Munich Re: Insurance not a cure-all for poor risk selection in mining

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The inaugural Munich Re Mining Re/Insurance Client Seminar held in Johannesburg last week had a sobering message for global mining conglomerates and their insurance and reinsurance partners: underwriting profit margins are increasingly being squeezed, but charging higher premiums (or attaching conditions to policies) won’t help if the underlying risk is not addressed.

“You cannot change a bad risk into a good risk by covering it with insurance,” Nico Conradie, CEO of Munich Re, told the delegates.

He believes the solution lies in sound risk management practices and ongoing cooperation between insurer, insurance broker and corporate risk manager to manage risk and mitigate losses. It is especially important that the insurer has all the necessary information it needs to correctly assess a company’s risk, according to Günter Becker, head of Mining at Munich Re Corporate Insurance Partners. Following through on recommendations made by loss prevention experts and their insurers’ risk engineers is also critical.

The mining industry experienced 61 significant losses globally over the past year, with 16 of those occurring in South Africa. The three worst domestic mining incidents are expected to cost mining firms and their insurance partners in excess of R1bn each.

Becker warned that increased claims volatility could lead to reduced re/insurance capacity in the mining segment. “Over the past four years, mining insurance premiums were softer, but deductibles and coverage remained unchanged, with the result that the premium pool is getting smaller while losses and claims pay-outs are getting exponentially bigger,” he explained. He is concerned that the mining insurance industry could suffer a similar setback to that experienced in 2009 when loss ratios surged to around 250%.

Some insurance markets, like Lloyd’s in London, have responded to tough market conditions by reducing capacity in multiple insurance sectors, including mining, and large insurance carriers are reluctant to insure riskier underground mining operations. They will only accept this type of risk in the event of higher levels of reinsurance (excluding certain risks or insisting on higher excesses).